The transactions would restricted to instruments where the relevant regulated market was illiquid, and have to be approved on a case-by-case basis by the ASF.

The ASF’s proposals would also ease the asset risk weighting of certain non-investment grade asset categories from 0% to 25%, including holdings in Romanian leu, freely convertible currency accounts and deposits, and treasury bills and government securities issued by EU and EEA member states.

The weighting on investment-grade corporate bonds would rise from 50% to 75%, and that on non-EU or EEA government securities traded on regulated Romanian, EU or EEA markets from 50% to 100%.

Mihai Bobocea, adviser to the APAPR, told IPE that the change in these risk weightings would free up portfolios to increase their equity investment.

“The new regulation favours a little bit more allocation into all other instruments rather than government bonds. Also, it slightly reduces the previously exaggerated risk-valuation gap between ‘investment grade’ and ‘non-investment grade’ instruments,” he said.

“However, we do not expect these changes to significantly affect other allocations other than a slight increase in the share of equity in pension fund portfolios. Currently, the average is at about 20% of all assets, but we do not expect it to go as high up as 25% for example, even under the new, more relaxed, regulations by the AFS.”

Bobocea added that other regulations, such as the relative guarantee return benchmark, would maintain an investment herding instinct.

The ASF has also proposed a significant change in interest-rate hedging, currently restricted to instruments traded on regulated markets, but only for third-pillar funds.

Where the regulated market is insufficiently liquid to allow such contracts to be initiated or unwound at any time, the funds will be able to use over-the-counter (OTC) derivatives such as forwards and swaps.

As in the current legislation, such hedges would be confined to assets with a minimum five years’ residual maturity from the date of the transaction.

The proposals specify that such OTC derivatives must be valued daily, and be able to be – at the fund manager’s initiative – sold, liquidated or closed at any time at their fair value, and with the original counterparty.

The size of all derivatives contracts must not exceed the repayable principal sum of the underlying assets hedged. Fund managers would also be obliged to use the International Swap Dealers Association’s master agreements adjusted to Romanian legislation.

The use of additional interest rate hedging tools would prove valuable for third pillar funds: as of the end of April 73% of their aggregated portfolio was invested in bonds.

Bobocea said he was disappointed that the second pillar would not be able to benefit.